Fairholme Fund Reduces CIT and AIG, Sticks With Other Holdings in Q3

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Closely watched mutual fund investor Bruce Berkowitz has revealed that he made few changes to his Fairholme Fund in the third quarter. His biggest move was a 27.8% reduction to his CIT Group (CIT) holding, followed by a marginal reduction of top holding American International Group (AIG). The portfolio remains, as it has since late 2009 and early 2010, all financials battered in the financial crisis, with the exception of Sears Holdings Corp. (SHLD), a retail stock.

Berkowitz sold 3,779,400 shares of CIT Group for $37.50 per share on average in the third quarter. It was his fourth consecutive quarter to sell shares of the company. He initiated in the position with over 11 million shares in the first quarter of 2010, when the price was $34 per share on average. At the end of the third quarter 2012, he owned a total of 9,817,629 shares, equivalent to 6.5% of his portfolio.

CIT is a bank holding company that provides financing and leasing capital to small business and middle market clients in more than 30 industries, as well as operates its primary bank subsidiary, CIT Bank.

“The facts are we bought companies after they turned. Their values, their book values, liquidate values, bad debt ratios, ROEs, ROAs, whatever you want to look at, were improving. The fundamentals, the facts. AIG, Bank of America, CIT – all of the financials that we’ve invested in,” Berkowitz said in an Oct. 13 interview onWealthTrack with Consuelo Mack.

In the quarter Berkowitz began to invest in CIT, the first of 2010, the company’s total cash and deposits had increased to $10 billion from $9.8 billion the previous quarter, book value increased to $42.63 per share from $41.99 per share the previous quarter, and total liabilities declined to $49.5 billion from $51.6 billion the previous quarter.

The company’s Tier1 and Total Capital ratios increased to 15.5% and 15.8% from 14.2% at Dec. 31, 2009.

In the third quarter results announced Oct. 23, 2012, CIT reported a net loss of $305 million or $1.52 per diluted share, compared to a net loss of $32.8 million or $0.16 per diluted share the previous year. The results were affected by $471 million in charges for the redemption of $4.6 billion of high-cost debt, which officially paid off its restructuring-related debt totaling $31 billion since 2010. The year-ago period had charges of $169 million for the redemption of $4.5 billion in loans and debt.

The company’s total cash and deposits increased to $6.5 billion from $6.1 billion the previous year, book value declined to $40.26 from $41.73 per share, and total liabilities increased to $35.5 billion from $24.4 billion over the same period.

The company’s Preliminary Tier 1 and Total Capital ratios were 16.7% and 17.5%, respectively, down from 18.0% and 18.9%, respectively, at June 30, 2012.

Berkowitz’s lone other move in his Fairholme Fund was to shave 946,600 shares of his AIG holding for $33 per share on average. At quarter end, he owned more than 80 million shares of the company, equivalent to 37.4% of his portfolio. He amassed the position from the second quarter of 2010 to the second quarter of 2011 and is the second largest owner, after the government.

AIG is the massive insurance corporation that was rescued from collapse by the U.S. government during the 2008 financial crisis. In its most recent second quarter results, the company announced a 13.9% year-over-year increase in net income to $2.34 billion from $2.1 billion, a 5% increase in book value to $60.58, and return on equity of 7.7%, increased from 6.6% the previous year.

After rising almost 50% this year to trade for $34.72 on Monday, AIG still sells at a fraction of book value. It does not appear that Berkowitz’s positioning in the company, or any of his other financials, will be changing any time soon. When asked on WealthTrack when he would consider selling, Berkowitz responded:

“The book value is near $70, it’s going to continue to grow. The price less than $35 will eventually reach book value. Maybe that happens in the $70s or the $80s. When it gets about there we’ll see. But companies such as AIG can trade at a multiple of book value. But I don’t want to go there yet. Just getting to book value will be a very nice return for shareholders. It’s a very similar case for Bank of America (BAC). It’s a similar case for Sears.”

Berkowitz’s other top holdings remain: Sears Holdings (where he is the second largest owner), Bank of America, St. Joe Corp. (JOE), Leucadia (LUK) and MBIA (MBI).